Hi Gang..
This is my first post. Been looking around for a few days. Lots of great information. Great work.
My wife and i are expecting our first baby in a few months, and the financial squeeze means we’ll have to sell our IP in the inner west. just can’t afford the 2 mortgages on one self employed, irregular cashflow wage.
We were having a debate about whether you can claim the agent’s commission/fee as a tax deduction after it’s sold. I’ve looked around but couldn’t find much info. I can’t see any reason why not, but i may be wrong..
Thanks for your help. Happy New Year!!
MC
Talk to an accountant.
You should be able to claim the buying and selling costs off the profit you make prior to calculating the CGT.
I don’t believe you will be able to claim it as a straight deduction off your income tax.
Cheers,
Simon Macks
Mortgage Broker
[email protected]
0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
Hi MC,
Stagefright hey… lol [
]Anyway, Simon is right. The cost(s) of selling the property (including legals, agent commission, advertising etc) is all deducted from your ‘profit’ with the balance most likely being taxed as a capital gain.
The only exception is if you are in the business of buying and selling property, in which case there is no CGT as such, it is all taxed as ordinary income. In this case the costs of selling are treated as a normal tax deduction.
In case you are confused, let’s flesh out an example.
Parameters
Property bought for $100,000 (after all costs) and sold 24 months later for $180,000. Sale costs (legals etc.) come to $5,000. Taxpayer is an individual.
Example One – Investor
Sale price: $180,000
Net purchase price: ($100,000)
Profit: $80,000
Reduction in cost base – sale costs: ($5,000)
Adj Profit: $75,000
CG Discount (50%): ($37,500)
Profit to be shown in ITR as Cap Gain: $37,500This will be taxed at the taxpayers appropriate marginal rate
Example Two – Property Trader
Sale price: $180,000
Net purchase price: ($100,000)
Profit: $80,000
Tax deductions – sale costs: ($5,000)
Profit to be shown in ITR as ordinary income: $75,000As to whether a taxpayer is an investor or a trader, there is a substance over form approach and several tests that the ATO applies. In the majority of cases though, unless you are regularly buying and selling property, most investment property taxpayers will not be traders.
Hope this has helped.
Happy New Year!
Steve McKnight
**********
Remember that success comes from doing things differently.
**********Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Hi Steve,
So lets say i become a trader, how would i prove this to the ATO, or do i need to get some kind of forms from the ATO, to show proof, that i buy and sell property as a trader?
Or do i need to not have a job, to be a property trader?
cheers,
s.i.sHi SIS,
Happy New Year mate!
Drats… I was hoping I wouldn’t be asked that. Sadly, there is no easy or definitive answer (like buy and sell XX properties and you’re a trader).
It’s a matter that needs to be discussed with your tax adviser to determine if you are in the business of buying and selling property.
So how do We Distinguish a “Business” from None Business? The Australian Tax Office does not require that a business is making a profit to be a “business” – or that something making a profit is a “business”. It has the following critera for it to be more likely to be “business” if:-
(1)large scale operation and/or
(2)involves employees and/or
(3)frequent acts/transactions and/or
(4)conducted with a view to profit and/or
(5)profitable and/or
(6)conducted over a long period and/or
(7)conducted continuously and systematically and/or
(8)in commercial premises and/or
(9)involves items typically dealt with commercially and/or
(10involves exercise of specialized knowledge and/or
(11)significant capital investment and/or
(12)business records kept and/or
(13)full-time and/or
(14)market research done and/or
(15)associated with other commercial activities of taxpayer and/or
(16)existence of business organization, registered business name and/or
(17)advertising and/or
(18)active –Source:http://www.goldcoastcroquet.com.au/business/Busines1.htm
As you can see… it is not ‘cut and dry’.
Cheers,
Steve McKnight
**********
Remember that success comes from doing things differently.
**********Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Thanks Steve,
As soon as i saw, the profit can be shown as ordinary income, it was like a new light shone upon me. [
][][]Will futher research and investigate this, but thanks heaps for your reply and web link.
Wish you a Happy New Year
cheers,
s.i.sHi,
Yeah mate… just be careful though as you’ll lose the 50% CGT discount if the income is taxed as ordinary income.
You need to weigh up the pros and cons.
See ya,
Steve McKnight
**********
Remember that success comes from doing things differently.
**********Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Hi Steve,
thanks again, the idea of the trader, seems to hold some good ground, and the benefit of using it as your sole way of making income, does come with its benefits and downside, though just claiming the 50% CGT discount, still gives you the ability to, still pick up work,
if in a needed case, if you cannot liquidate a property during a specific period, in time of needed cashflow.
this is a hard choice to make, but does have a very good achievable turn arount point.
thanks again,
s.i.sPossibly a good idea to use a company for certain type of deals as this will enable you to keep your private investments seperated from your business.
Better ask an accountant, I am not one.
Cheers,
Pisces133
suppose you have to work out the numbers to tell you which saves you money… if trading is the way to go you could get a company if you fall into the above 30% bracket – as pisces mentioned
Hi Pisces133,
The only way i can see it, is to set up a company and with in that company a hybrid trust, though im still not sure if the hybrid trust can act as a trader, or does it have the benefit to act as both.
But then if you are the beneficeriay, i see that you will still have payed that tax again.
grrrr……
this is hurting my head……
cheers,
s.i.sHi Piscies,
Just watch out… a coy does not qualify for the CGT discount. It needs to flow through to an individual.
SIS has the right idea… you can have a corporate trustee for a trust and so long as the cap gain flows through to an individual the CGT discount applies.
Cheers,
Steve McKnight
**********
Remember that success comes from doing things differently.
**********Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
My thinking is that if one is considered to be a trader by the taxman then the only way to clearly differentiate one’s personal investment is by placing the trading stock in a company Pty Ltd (or a Trust).
I understand that Steve has published a booklet about Trusts guys.
If you go to the home page it stares you into the face.
Steve, does this booklet go into the subject of hybrid trusts as well ? (Don’t know the difference in any event but PropertyGuru is emphatically suggesting that a hybrid trust is the better way to go).
Pisces133
Hi again,
Back after lunch…
I’m not a big fan of hybrid trusts. The main advantage is that a hybrid allows you to have a fixed and floating entitlement, yet for most investors all that’s required is a properly set up family trust (fully floating).
In other words, a family trust allows you to share profits however you like and you can just keep the distribution equal or otherwise. That is… what’s the benefit of locking in?
Invariably hybrid trusts are more complicated and thus require more accounting fees to keep compliance under control.
Perhaps the only point of difference is when you are pooling funds from many investors across various families and the idea of setting up partnerships of family trusts is not appealing from a risk perspective.
The product you mention (WealthGuardian) does not venture into into realm of hybrid trusts as I deemed it too complicated and something better kept to professional advice in the right circumstances.
Cheers,
Steve McKnight
**********
Remember that success comes from doing things differently.
**********Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Hi Pisces133,
Hybrid Trust are complicated,
Here are a few advantates, that i can think of.
See with a Family Trust, you can only have +ve cashflow assets, were as hybrid you are able to have -ve geared and +ve geared properties that run at a lost or profit.
Hybrid trust has both similaritites of unit trust and family trust, there are more tax advantages as well.
With Hybrid trust you have more flexibility in sacking and appointing a new trustee.
Hybrid trust also gives you the flexibility to distribute different amounts to the beneficearies.
Theres lots of things, but has more advantages than Family Trust.
A big disadvantage, is that many accountants dont understand Hybrid Trust
Other thing too. Trustes dont pay tax
Talk to an accountant, who knows how to structure hybrid trust properly and who has indepth knowledge.
cheers
s.i.sHi SIS,
A couple of points to note (albeit perhaps at the complicated end of the discussion):
See with a Family Trust, you can only have +ve cashflow assets, were as hybrid you are able to have -ve geared and +ve geared properties that run at a lost or profit.Well, you can do the same in a family trust too. Indeed, the issue of trust loss provisions is very complicated, but the same essence is true… you cannot distribute a loss from a trust, instead it is accumulated and carried forward.
In the case of a family trust, an income loss (as opposed to a cap loss) would offset the income and the nett profit distributed or the nett loss accumulated and c/f.
Hybrid trust has both similaritites of unit trust and family trust, there are more tax advantages as well.Hmmmm – I don’t think this is correct… what are the additional tax advantages?
With Hybrid trust you have more flexibility in sacking and appointing a new trustee.Perhaps, but I’ve never seen this advertised as a benefit before. In truth, the trustee appointment / removal provision of most trusts are the same as the wording is similar.
Hybrid trust also gives you the flexibility to distribute different amounts to the beneficearies.This is possibly ture, but it depends on the circumstances of the structure. The same effect can be gained from a family turst where the Trustee distributes according to a formula (ie %) rather than $.
Theres lots of things, but has more advantages than Family Trust.Hmmmm. I don’t necessarily agree. I haven’t ever used a hybrid trust and I don’t think I’m the poorer for it.
A big disadvantage, is that many accountants dont understand Hybrid TrustThis may be true, but most qualified accountants – and certainly all tax professionals would know the hybrid trust drill.
Other thing too. Trustes dont pay taxMate – this is wrong. Trusts DO pay tax on any undistributed profits, and the Trustee pays it (on behalf of the trust) at the top magringal rate (48.5%) from dollar one.
Cheers,
Steve McKnight
**********
Remember that success comes from doing things differently.
**********Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Hi Steve,
I should have added in the last bit, that trusts dont pay tax, but distribute it, and carry it forward.
But thanks for pointing out the difference between the two.
Give me some time to chase those other answers up, just about to go out. When i come back ill post up what other pros a hyrbrid trust has.
cheers,
s.i.sHi All,
Happy new Year. I am on holiday so can’t write much but..
Hybrid Trust = Family trust advantages + extra benefits
Yes it’s a bit expensive to manage and few accountants know in deep about it.
But in the current market when it’s bit hard to find all the +ve cash flow Properties and you are new or not big investor you want to get benefits of taxes, losses in the current year not in the coming years according to me hybrid trust is good.
But may be for people like Steve and big investors whose trust generating big/some money every year not much difference between family trust and hybrid trust.
Cheers
[
]
PropertyGuRu
Who want to be billionaire?The extra tax advantages are
Though this will depends on the current tax laws(these laws are forever changing), that a hybrid trust allows for loss of income and income streaming.
There is much more limited liablilty as it is easier to control and mitigate.
Hybrid Trust has the power of retention and flexibility inherent of discretionary trusts(family trust), as well as satisfying the less stringent tests inrelation to non-discretionary trusts (eg trust lossmeasures).
Hybrid Trust also has the ability to combine fixed interests with discretionary interests.
The other reason is that hybrid trust are popular because, the fixed interest on the income and on the capital of the hybrid trust will provide the unit holder(who is hte beneficiary) with a beneficial interest in the assets that sit in the trust.
ok… Steve
this has really hurt my head, but in simple words, this is more benefit to people who also have -ve geared properties that are running at a cost and that the hybrid trust will offer more Asset Protection than the family discretionary trust as it is much more flexible.
Other note to point out, if the hybrid trust owns the family home. Many people want their family home to be the best home, and usually a nice home. Even if this means runing the home in which you live in, which is owned by your Hybrid trust at a lost.
cheers and thanks…… ouch my head,
s.i.sAs my understanding of trusts goes – a unit trust has ‘units’ that are similar to shares in a company. You can borrow to buy these units, and claim the interest as a tax deduction against your income from the trust. The income is distributed strictly in accordance with ownership.
A family/discretionary trust does not give you the same tax benefits for borrowing and lending money to the trust. In a unit trust, effectively, you can claim a loss in your personal income tax return (where the interest claimed for the money you borrowed is more than the ‘profit’ distributed from the trust). The trust will profit, becuase it does not have a loan to service.
So when you combine the two types of trusts, you can borrow funds to buy units in a Hybrid trust and distribute income and ‘negatively’ gear in your personal tax return. At a later point, the trust can then borrow money against the asset (it owns it, and was letting you use the asset as security), and pay you back for your units. At this point, the discretionary part kicks back in, and you can distribute the profit to any beneficiary. when there are units oustanding, profits are paid as per a unit trust.
Cheers
Mel
]
][
You must be logged in to reply to this topic. If you don't have an account, you can register here.
